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Out Of Business

What happens when your personal dream turns into every entrepreneur's nightmare?
August 1, 1998
URL: http://www.entrepreneur.com/article/16544

Failure is perhaps the scariest word in an entrepreneur's vocabulary. Like some evil thing lurking in the corner of every small business, the shameful closing is the unanticipated antithesis of the celebrated grand opening.

But it happens. Although statistics show that many small-businesses fail, W. David Waters certainly didn't expect to become a statistic. He intended Honolulu-based Centaur Zone Cafe to be the prototype of an international franchise of coffeehouses. "This," he says, "was supposed to be the launching pad."

Instead, Waters found his plans dashed after just one year in business. "I thought we'd either be an overnight sensation or we'd flop," he says, "but I never dreamed we would just drag along, hanging on to tidbits of hope here and there. It was emotionally and psychologically trying."

Once Upon A Time

If not a happily-ever-after conclusion, the tale of this coffeehouse certainly enjoyed what seemed to be a storybook beginning. With a Georgetown University dual degree in international management and finance and years of management experience under his belt, Waters set about in early 1996, as any proper entrepreneur would, doing research. He identified a cross section of target markets in downtown Honolulu: the artsy crowd from the Hawaii Theatre that was across the street from his proposed location and wealthy Asian students from Hawaii Pacific University (HPU) around the corner. He consulted other coffeehouse owners, a SCORE representative and the director of a national coffee organization. A local banker was so impressed with Waters' business plan, he wanted to nominate him as SBA entrepreneur of the year before the coffeehouse even opened. "Everyone," Waters says, "was helpful."

Getting start-up capital was a bit trickier. Waters found a Japanese investor who added $13,000 to Waters' $10,000 from savings and credit cards, but the SBA turned down his loan application because, according to Waters, the business was new and had no collateral. Instead, he borrowed $20,000 from his father. "I sent him my business plan," Waters says, "and he sent me a check and wrote `Go for it.' "

In October 1996, Waters signed the lease for his location and started fixing up the place: painting, buying antiques and adorning the used furniture with trendy animal prints and purple velvet coverings. Centaur Zone Cafe officially opened on January 6, 1997. His first day was slow and depressing, says Waters. "So many people saw me painting, bringing in antiques, and they kept saying `We can't wait for this to open,' " he says. "So we thought once the doors opened, people would come in."

Still, Waters hoped that a dance performance at the Hawaii Theatre would bring business. "We passed out fliers, and we bought all these desserts," says Waters. "The theater closed, and everybody just walked by. Less than 10 people came in. It was so embarrassing."

When word-of-mouth started to spread, Centaur Zone Cafe did become, as planned, a hangout for college students. The business broke even after three weeks, but Waters didn't exactly feel like celebrating. "We were making enough money to pay the rent and electricity," he says, "but not enough for me to pay my own bills."

When summer hit, students departed, and business once again slowed. Waters' property management company agreed to give him an extension on rent payments until the fall. But by the time students returned, Hawaii's poor economy, entering its seventh year of decline, had already started to take its toll on the coffeehouse.

Waters says the recent financial crisis in Asia was "a double punch to the stomach. We were hit immediately." Although the number of HPU students in the cafe decreased significantly, Waters says, "Part of me kept wanting to go on. But in another sense, we were wondering why we should try."

Waters' father gave him one last boost of inspiration. "My father has always supported me. He called and said he wanted me to stick this out for at least two years," Waters says. "He's never been so opinionated about something in his whole life."

This time, however, the property managers weren't as sympathetic. "Closing wasn't my choice," Waters says. "They decided it for me."

Waters believes his perseverance may have led to his final mistake: He didn't seriously consider selling the business. "I thought, `If I can't make a go of it, why would someone want to buy it?' " says Waters. "I didn't think of selling it, but I never thought it would close, either. Until the end, we thought something miraculous would happen."

So did his customers. "You know you've been doing something right when students tell you not to give them a discount because they want you to stay open," says Waters. "And this homeless person came in, gave us her ring and said, `I heard you need the money.' "

Closing Day

"It was nothing romantic," says Waters of that fateful day this past February. "The coffeehouse closed like it opened. It just sort of opened and just sort of closed. I thought I'd break down and cry, but I didn't.

"Our hearts started it; our personality was in that coffeehouse. So when we closed the doors at 3 a.m. on Sunday morning, it was just a shell."

Waters has since moved to San Francisco, where he is seeking a high-tech job. "I thought it'd be nice to get a paycheck every two weeks," he reasons.

At least Waters' experience hasn't left him bitter. "As time goes on, you remember the good stuff, and the bad stuff isn't as bad," he says. "Even after a year [in business], I'd look around and think, `I still love this place.' I never got bored with it."

Do those fond memories mean Waters would someday, somehow, consider starting another business? "Yes," he says, "and I'm kicking myself for it."

Report Card

Business critique by Sam Slom, business consultant and president of Small Business Hawaii, a Honolulu-based association of small-business owners:

"Waters' objective was laudable and ambitious. But was it realistic? Locating in downtown Honolulu has built-in traps, unlike a mall; in most cities, downtown areas are more transient and economically depressed.

"Another mistake Waters made was to rely too heavily on students, who generally are not income-stable--or product- or geographic-loyal. Also, the Asian economic downturn was being increasingly discussed, so targeting his coffeehouse to nonresident Asian college students was a big mistake.

"Hawaii also has the highest mandated benefit costs, including compulsory medical and burdensome workers' compensation, unemployment, temporary disability insurance and liability costs, which can add 50 percent to payroll costs and cut down on cost/revenue ratio.

"Waters' biggest mistake was underestimating the consequences of Hawaii's worst-in-the-nation business and tax climate which, for eight years, has gobbled up big and small businesses while breaking many able entrepreneurs."